As an entrepreneur, it’s always worth contemplating an important question: “When should I sell my business?” This may seem unrealistic if you’ve just started your company or are attached and have no interest in walking away just yet, but consider this– in good times and in bad, divesting may simply be a smart business decision. So, keep an open mind and consider the following checklist to help you decide if the timing is right.
Is your business attractive?
The economy, the industry, competitors— are certainly all factors that may affect how attractive your business looks to potential buyers, but the reality is that it doesn’t really matter, so long as you can prove that your business is an attractive investment. Need proof? Look no further than these major acquisitions that happened in 2020, a time when the economy struggled during a global pandemic. Still, T-Mobile acquired Sprint in a multi-billion dollar deal, and at arguably one of the lowest times of the year, Salesforce acquired Slack for over $27 billion dollars.
For investors, it all boils down to the ROI. In other words, if you can demonstrate your company has a promising future, why wouldn’t they consider it?
Even if you’re not looking to sell right now, it’s important to keep your business prepared in case someone inquires. The following tips will help show its potential:
Grow your business and margins.
No matter how solid your team or trendy your industry is, a buyer will inevitably first focus on the state of your financial statements. Show your strengths through operational efficiency, growth potential, and steady revenues.
Start by cleaning up your books. A buyer is going to want to dive deep into your P&L to start. Though they will be looking for multiple key indicators, the two biggest are top-line revenue growth and profit margin.
Determine how you fare against others in your industry.
Look up benchmarks for what is good vs. great for your industry. For example, if you have a marketing agency with 15% year over year revenue growth and 15% margins, then that’s good. 30% year over year revenue growth and 30% margins is great!
Every industry has its own benchmarks, so know yours and make that your goal. These are the back of the envelope numbers that will allow you to negotiate the best deals for a potential sale. If you’re below average for the trailing 12 months for both revenue growth and margins, then you will likely get an offer that is lower than what is ideal. That’s why you should use these benchmarks to get to a point where you will be more attractive to buyers!
Because you’ll want these numbers to be an average of the trailing 12 months of your business, it could take you a year to hit, and that’s okay. Everything is circumstantial so if you just want out of the business or need the cash, then maybe getting anything you can out of your business as an asset is what you need.
Know your business’s worth.
Before going into any valuation conversation, you need to do some groundwork on your own so you can have a good idea for a ballpark number that makes sense. Otherwise, you may get an offer that tremendously undervalues your business. If you come to the table with a valuation and other comps (comparable companies that have sold for similar multiples), buyers will know you’ve done your homework making it harder for you to be taken advantage of.
There are a number of ways to value your business and some of the most common are:
- Enterprise Value = (market capitalization + value of debt + minority interest + preferred shares) – (cash and cash equivalents)
- EBITDA = Earnings Before Interest + Tax + Depreciation + Amortization
- EV (Enterprise Value) = Equity Value + All Debt + Preferred Shares – Cash and Equivalents
- Revenue = Total Annual Revenue
If you do a calculation and your valuation range is not quite where you would like it to be, then maybe it’s not quite time for you to sell. But now you have the benchmark and you know what you need to do to get your business to a place where you are comfortable selling!
Develop a succession plan.
Succession planning will be a part of every buyer/seller deal discussion. What happens post-sale with the business is hugely dependent upon the buyer’s intent and the type of business being sold.
It is very common that as part of the sale agreement that the new business buyers would want the executives to stick around for a certain period of time. Sometimes it’s a few months to help in the transition, and others it’s as much as 2 years. This is something you should be cognizant about going into a negotiation. Hiring a COO or a President a year in advance of your eventual sale and getting them up to speed on all the ins and outs of how to run the business could be a good way to mitigate the need for you to need to be involved in the business transition.
Do you have a plan after the plan?
Sure, there are plenty of benefits to selling a business, but let’s not make any snap decisions— what exactly will your next move be? Head back to the 9 to 5 life? Move on to the next big opportunity? Retire? Are these plans for your future realistic, or are they just a fantasy? There’s a lot to consider before deciding to sell your business, this is not the time for a knee-jerk reaction, no matter how great an offer is.
It’s important to have a solid plan for your life (and your income) in the time that follows, and carefully consider what you’ll do with that financial windfall.
- Do you know how to invest it?
- Will you be hands-on with money management, or hire a financial advisor?
- Will you seek out passive income streams?
- Do you plan to invest it into another venture?
For some, owning a business is a source of fulfillment and passion. That’s why it’s crucial that entrepreneurs consider the value their business has brought to their lives and how to fill that void moving forward.
Is it the right time?
If you’re on the brink of selling your company, you know that timing is important, as market conditions are constantly changing. Ask yourself questions like:
- Have new competitors entered your field?
- Are you facing increased regulation?
- Does a recession seem imminent?
If so, it might be smart to get out now, especially if you aren’t sure you can withstand the hard times ahead. Still, selling your business is more than just economics. Personal preferences are just as important. Imagine you get a great offer from a qualified buyer, but you’re still feeling emotionally invested. Maybe it’s not the right time, and you aren’t ready to part ways yet.
Just because you’ve received a lucrative offer doesn’t mean that selling is the default choice. There’s no shame in deciding the timing just isn’t right.
Are you prepared?
Even if you don’t plan to sell in the foreseeable future, you should still have a game plan for potential opportunities. The reality is, buyers will be prepared. They’ll know your industry. They’ll know your customers. They might even know a bit about your financials. Their goal is to get the lowest price possible, so any information they can get beforehand may be used strategically during negotiations. That’s why being prepared with a high-quality team is so crucial. Your lawyer, your accountant, and your financial planner are some of the best resources for advice and insights.
Lean on others who have been there.
Starting a company will often make you feel like you’re stumbling around in the dark. Wondering if you should sell your business, unfortunately, can be just as overwhelming. For this reason, it’s helpful to have an experienced network of fellow founders who have been through it. A community like growth10 can be a major asset in these efforts, allowing you to tap into the knowledge and experience of a diverse entrepreneurial collective– some have experience selling their business while others can offer insight into the buying side.
By providing access to educational content, networking tools, and a wide spectrum of in-person and virtual community meetups, growth10 can help you build relationships with peers you can lean on, serving as a sounding board as you decide whether selling your business is right for you.